Canada warned of cost escalation for LNG projects

CALGARY – A welder in Western Australia, home to a boom in liquefied natural gas that Canada aims to emulate, can pull in A$250,000 per year, or about $241,000. Salaries for truck drivers in the remote region start at A$100,000, “and go up from there,” said Derek Thomas, director of strategic technologies at AG&P, an engineering services company based in the Philippines.

That type of cost inflation could well show up on Canada’s West Coast, industry participants say, should energy giants Chevron Corp., Royal Dutch Shell Plc and Malaysia’s Petronas launch multibillion-dollar construction programs at the same time.

Canada needs to look at what happened – good, bad and ugly – over in Australia, and put that in local context

“Canada needs to look at what happened – good, bad and ugly – over in Australia, and put that in local context and decide what lessons can be learned,” Mr. Thomas said Tuesday on the sidelines of a Calgary conference focused on LNG exports. AG&P builds components for LNG plants, including several Australian projects, at its yards near Manila.

“Canada does risk the same sort of issues in terms of cost escalation” as Australia, he said.

The British Columbia government is counting on natural gas exports to fill provincial coffers with billions of dollars over several decades. The province has touted advantages such as a cool climate, which means it takes less energy, and is therefore cheaper, to chill gas into a liquid fuel. But new entrants are skeptical that B.C. can escape Australia’s fate, where a building frenzy saw costs for Chevron’s Gorgon LNG plant blow past $50-billion.

“We’ve got to be careful. This is a highly competitive business,” said Byng Giraud, vice-president, corporate affairs, with upstart Woodfibre LNG Export Pte.

Woodfibre, backed by Indonesian-based Pacific Oil & Gas Ltd., has signed preliminary supply agreements with Tenaska Marketing Canada and EDF Trading North America to supply a small export plant proposed for the Squamish area north of Vancouver. The company has applied to the National Energy Board to export about 280 million cubic feet of gas per day.

Mr. Giraud said Canadian projects face new competition from a growing number of U.S. export schemes.

Many U.S. plants are old import terminals being repurposed to export shale gas, he noted, making it easier to accommodate demands by countries such as Japan and India for cheaper LNG. The two countries have teamed up to push for prices that reflect the lower North American gas benchmark.

Canadian projects are “going to face a more realistic price, more of a world price,” Mr. Giraud said Tuesday. “We have to compete with that. You can’t simply say here’s this bonanza coming down the road. You’ve got to be a little more honest.”

Not everyone is convinced the U.S. and B.C. projects are in direct competition.

“At the end of the day the market for LNG is growing,” said Bill Gwozd, senior vice-president of gas services at Ziff Energy Group, a unit of HSB Solomon Associates LLC.

“I think we need the Canadian supplies,” he said. “I think we need the U.S. supplies.”

Price negotiations remain fluid. Several U.S. Gulf Coast projects have inked sales contracts with Asia-Pacific utilities based on the Henry Hub, the U.S. benchmark.

Chevron, the second-biggest U.S. energy company, has rebuffed similar demands for its Kitimat LNG scheme, arguing higher prices are needed to justify the higher capital costs of Canadian projects.

But some buyers in fast-growing China are pushing for change.

“I’m a buyer, so I want lower prices,” said Meng Xianlong, assistant general manager with the engineering unit of China Huadian Corp., the country’s fifth-largest state-backed power generator. The company is keen to import Canadian natural gas, he said, but not at any price.

“If there is another price mechanism [besides oil-linked contracts], we would like to talk about it with the partner,” Mr. Meng said.